News focus: Law's big bang 'being stymied by regulators'

Litigation funders must be extremely careful as the secondary market for legal finance develops, a market leader warned this week. Christopher Bogart, chief executive officer of Burford Capital, told the International Litigation Finance Association (ILFA) 2023 European Conference that, while a strong secondary market would be a positive development, the potential for loss of legal privilege posed a huge risk.

Speaking with other funders at a panel session addressing the ‘state of the industry’, Bogart said: ‘We may well see a world in which some of us [litigation funders] become originators, and others become secondary participants in deals. You see this very easily, for example, in the loan syndication market – one big bank, say JP Morgan, will go out and create a big new loan, and turn around and immediately syndicate it to 20 other smaller banks.

‘That’s positive… as long as we are all incredibly careful to protect privilege. I think one of the huge risks for this industry is that we muck up the protection of legal privilege. The moment we do that – the moment the court finds that we have distributed privileged information too broadly to too many potential investors or buyers, and therefore have waived [privilege] on behalf of the client, that’s a very bad day for us – and that will cause clients and law firms to stop giving us the information that we need.’

Andrew Saker, chief executive officer of Omni Bridgeway, said the development of a secondary market was ‘something that’s starting, and will continue to evolve’, in the same way that other financial sectors such as private equity developed secondary markets over time. He added that the secondary market would appeal to those investors who wanted ‘shorter duration’ risk.

Sarah Johnson, co-head of litigation finance at D.E. Shaw, added: ‘We have a relatively lean team, and I think there’s a lot of firms out there – especially multi-investment firms – that don’t have dedicated litigation finance teams, but who are interested in the space and would like to deploy capital.

‘As you see the “pure play” funders invest, structure and develop the investments, there comes a transition point where someone who doesn’t have that much expertise but has interest, would like to play. That would be a very positive development in the space.’

However, Bogart said the development of a secondary market was being hampered by the reluctance of secondary investors to offer better financial terms to account for the fact that they are investing later in the claim journey, when risks are more certain. ‘If you look at other specialist finance asset classes, you see a sharp distinction between secondary and primary pricing, that we are not seeing yet in the secondary market here in this [litigation finance] world. That needs to change for this to become a sensible outcome in most cases,’ he said.

The panel also discussed the opportunity for funders to invest in law firms or provide growth capital. Neil Purslow, chief investment officer at Therium, said: ‘This is [already] happening more than people say. We certainly will be doing it and it’s an interesting growth area; there are huge opportunities there to provide funds to the legal space on their own behalf.’

Burford took a minority stake in specialist London fraud firm PCB Byrne in 2020. However, while Bogart said he was pleased with that arrangement, he criticised regulators for not allowing law firms to take full advantage of the opportunities made available by the Legal Services Act 2007.

He said: ‘The UK had this incredible potential when the Legal Services Act was passed, and there was a sense among a number of people, including frankly us, that we would see the law version of the financial services Big Bang in the 80s here, because that was so progressive in terms of legislation. But unfortunately, as happens far too often in the UK, it’s been completely stymied by the bureaucratic ineptitude of the regulators here.

‘So you start with this incredible path, and then the SRA comes along and swallows up most of the entrepreneurial potential of that legislation. We’ve invested in a law firm here, but it’s not easy; it’s certainly not market-friendly and the SRA is not thoughtful about the policy rules behind the legislation. Instead, what you’re seeing is a pivot to Arizona and Utah, two states in the US that have now passed sort of UK-equivalent copycat [legislation] much later, and those are now attracting capital and real energy around these kinds of transactions.’

Bogart added: ‘It’s a tragedy to watch what’s happened here because right now, the market is largely moribund.’

Pictured above: Burford Capital’s Christopher Bogart (second from the left) spoke with other funders at a panel session

This article is now closed for comment.